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French elections: What to expect should Le Pen prevail

Our Blog Apr 10, 2017

Mark Burgess, Deputy Global Chief Investment Officer

Recent French election polls show that Marine Le Pen is a contender for the next French presidency. Her potential victory is perceived as increasing the likelihood of France’s withdrawal from the euro. What does the continued uncertainty of the election outcome mean for the EU and to global markets?

All eyes are on France as we watch the presidential election unfold. After Britain’s Brexit referendum and the U.S. presidential election surprised markets in 2016, could this event do the same?

The first round of the election is April 23, followed by a second round on May 7. If elected, Le Pen has promised to renegotiate the terms of France's membership of the European Union (EU) and ditch the euro. The perceived likelihood of France leaving the EU has created unprecedented uncertainty among voters, according to recent French presidential polls.

Marine Le Pen is the leader of the French national conservative party, the National Front. Le Pen’s election promises aim to treat and ultimately cure France’s ailments of high unemployment, high debt and a lackluster economy. If she is elected president, her success would depend on the make-up of parliament and on having a cooperative prime minister. Regardless, a President Le Pen would signal change with the potential to alter the face of the EU.

Le Pen’s key proposals:

Renegotiation of France’s EU membership

Return of the franc from the euro

Intelligent protectionism and trade tariffs

Lower taxes and better welfare

Drastic reduction of immigration and stronger national preference

More security and defense spending

What hurdles would Le Pen face?

The parliamentary elections are held a month after the presidential vote, and the results will determine the level of Le Pen’s power. An elected president does not have full control unless a majority parliament (289 seats) is secured. Given that a National Front-majority parliament is unlikely, a coalition government would have to be formed and the prime minister would be elected from the majority party in parliament. Under a coalition, President Le Pen would have a number of limitations on her power including, but not limited to:

Only selecting the defense and foreign affairs department and no other cabinet members

Having the ability to dissolve parliament, but not dismissing the prime minister

Implementing laws only with the agreement of parliament and the prime minister

What if Le Pen renegotiates France’s membership in the EU?

While some polls have indicated an increased likelihood for French voters to choose leaving the eurozone, also known as Frexit, fears of a devalued currency and the effect on individuals’ savings and mortgages cause an understandable reluctance to leave the single currency. An even broader potential issue is the effect on the wider economic currency union.

How will the markets react?

As a Le Pen presidency is perceived to increase the likelihood of France’s withdrawal from the EU, the uncertainty is likely to continue about what this could mean for the euro, along with a potential wider hit to global markets. Companies with strong balance sheets in sectors less affected by geopolitical events should be fairly resilient.

The greatest effect may be to European banks, which have been at the precipice of a crisis for many years now — dating back to Greece’s near-fallout of the EU. In the medium term, with the fragile state that the Italian banking system is currently in, its banking sector is unlikely to be able to withstand the fallout of a euro collapse. Certainly the interconnected EU banking system will be at the biggest risk of collapse, with consequences for the financial sector globally.

Bottom line

U.S. investors should watch for a Le Pen victory. She is the candidate perceived most likely to increase the likelihood of France’s withdrawal from the euro, which could have the greatest effect on global markets. Reacting to the uncertainty surrounding the upcoming election and the current market volatility with short-term decisions could be hasty. Stick to an investment plan based on predetermined, longer term goals.

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